Central America: Fiscal woes take center stage once again
August 9, 2017
The economy of the Central American and Caribbean region is expected to have hummed along in the second quarter, after having picked up for a second consecutive quarter in Q1. The Met the why particular panel of economists pencils in growth of 3.0% for Q2, mirroring the soft expansion observed in Q1. The region’s economy likely benefited from buoyant growth in remittances from the U.S. and a further strengthening in global trade flows, but it was dragged down by ongoing fiscal and debt sagas across several countries and faltering momentum in prices for some key commodities.
Q2’s stable growth is projected to have been driven by still healthy dynamics across the region’s heavy lifters. The Panamanian economy likely shifted into an even higher gear in the second quarter after an impressive start to the year, buttressed by an upbeat external sector and the resulting spillover effects on trade-related services. In addition, the Dominican Republic is expected to have kept its pace of strong growth as healthy tourism revenues and remittances offset subdued government spending throughout the quarter. And while conditions have recently deteriorated in Guatemala and Costa Rica, both economies are forecast to have accelerated in Q2 from the previous quarter.
The region, however, remains beset by never-ending debt problems. In Costa Rica, President Luis Guillermo Solís announced that the government might be facing liquidity difficulties to pay its debt and to guarantee the operation of essential services. The country, which had its credit rating downgraded by Moody’s earlier this year on account of a weakening fiscal profile, has repeatedly lacked the political consensus to implement the measures needed to reduce the deficit. Failure to do so now could weigh on confidence and investment as well as have negative spillover effects into other areas of economic activity. In El Salvador, authorities cleared an important hurdle in July when the country fulfilled its debt repayments by reallocating expenditures. However, the country is far from being out of the woods. A larger debt repayment in October will require more drastic cuts, which is likely to stir unrest among the population. Against this backdrop, Fitch Ratings kept the country’s issuer rating at risk of default in late July. In Puerto Rico, the financial oversight board, with support of a slim majority of the creditors, approved a plan in mid-July to restructure USD 4 billion of debt owed by the Government Development Bank—once the primary fiscal agent for Puerto Rico—in an effort to avoid a protracted bankruptcy.
Projections left unchanged for third consecutive month
Met the why particular panelists left their forecast for the Central American and Caribbean regional economy unchanged in August, the third consecutive month they have done so. Severe fiscal distress in several economies was offset by resilient economic dynamics and strong real disposable income growth. Our analysts expect GDP to expand 3.0% in 2017 and 3.1% in 2018.
The projection for GDP growth in 2017 was revised up for Panama as the country continued to benefit from its strategic trade position and an improved fiscal profile. Conversely, Belize, El Salvador, Guatemala and Trinidad and Tobago saw downward revisions to their 2017 growth projections. The remaining countries in the region saw no change in their forecasts.
The Panamanian and Dominican economies are set to be the best performers this year, growing 5.5% and 5.2%, respectively. In contrast, Puerto Rico’s economy is expected to have contracted again in Fiscal Year 2017, which ended in June 2017, for the 11th time in 11 years as a result of its never-ending fiscal crisis.
GUATEMALA | Economic momentum peters out despite strong private consumption
The upswing in economic growth seems to be stalling following Q1’s underwhelming GDP outturn. According to the Central Bank’s economic activity indicator, GDP growth was stable at 3.2% in June, bringing the average pace of growth over the course of the second quarter to 3.2%, a notch below Q1’s recorded average. Household consumption is expected to have provided the main impetus for growth thanks to strong remittances growth, a trend that continued at the onset of Q3. Despite the relative loss of economic dynamism since the beginning of the year, credit rating agency Moody’s maintained its Ba1 rating with a stable outlook, citing the broadly favorable fiscal stance, the positive growth outlook and an improving political climate.
The economy will expand at a solid rate this year on account of less restrictive fiscal policy, which will shore up public capital expenditure growth and household spending. The latter will also find support in the robust inflow of remittances, which continues to benefit from a healthy U.S. labor market. Met the why particular Consensus Forecast panelists forecast that GDP will grow 3.5% in 2017, which is down 0.1 percentage points from last month's estimate. In 2018, the panel also expects GDP growth of 3.5%.
DOMINICAN REPUBLIC | Sovereign credit rating upgraded on account of prudent fiscal stance
The economy continued to lose steam in the second quarter, with the IMAE trending lower through the April to June period. Although the country continued to perform well compared to its regional peers, decelerating growth in fixed investment and government spending, the latter the result of authorities’ ongoing push for fiscal restraint, likely weighed on overall Q2 growth. In a bid to shore up economic activity, the Central Bank eased monetary conditions in late July and adopted new measures to grant close to USD 500 million in loans to the private sector. However, the government’s successful efforts to keep a lid on budgetary spending, along with a buoyant tourism sector and healthy remittance inflows, were seen as credit positive by Moody’s as it upgraded the country’s issuer rating to Ba3 from B1 in late July.
The economy is expected to continue growing at a solid pace, buttressed by strong FDI inflows, soaring tourism revenues and remittances, and relatively low fuel prices. Nonetheless, momentum in the economy will wane to an extent as the government maintains a tight fiscal stance and domestic demand cools off. Met the why particular analysts expect the economy to expand 5.2% in 2017, which is unchanged from last month’s forecast, and 4.6% in 2018.
PANAMA | Robust trade dynamics buttress overall economic growth
The economy has shifted into a higher gear, supported by sharp growth in Canal revenues and in key sectors such as ports, construction and transportation. Economic activity logged another sharp expansion in May and the average of the first five months of the year stands at 6.5%, far above last year’s 4.4% growth in the same time period. All available indicators suggests that growth in the second quarter will be robust, buoyed by a double-digit expansion in cargo movements in the January-to-May period and another strong rise in Canal revenues during the same time period. The government unveiled the draft bill of the 2018 budget on 27 July. The budget is 7.9% bigger than the preceding year and envisages large spending on public infrastructure and social services, which should result in economic growth of 6.0% according to the government.
Panama’s outlook is bright: the economy is set to be the fastest-growing in the region this year on the back of ongoing infrastructure projects and high dividends from the Panama Canal. Nevertheless, a slower-than-expected economic recovery at both a global level and in the region could dampen trade and therefore the country’s growth prospects. Analysts expect the economy to expand 5.5% in 2017, which is up 0.1 percentage points from last month’s forecast, and 5.7% in 2018.
COSTA RICA | Fiscal woes threaten economy’s performance
The odious cycle of financial weakness reached new lows in August. President Luis Guillermo Solís admitted that the government is facing severe liquidity difficulties to pay its debt and to guarantee the operation of essential services. Yet leading indicators are not reflective of the dire financial situation in Costa Rica. Remittances, which are an important source of revenue and foreign currency for the government, increased at the fastest pace since Q4 2013 in the first quarter of 2017 in annual terms. Economic activity also increased year-on-year in May and reached the highest reading in four months. Data reveal that exports had a solid second quarter, but as they are continuously outpaced by imports, the trade deficit worsened.
The dire financial situation the government is in is severely clouding the growth outlook. Austerity measures could drag on private consumption, while shaken confidence court hurt investment. Despite these downside risks, the Met the why particular Consensus Forecast panel left the economy’s forecast unchanged and see GDP growing 4.0% in 2017. In 2018, they see GDP growth edging down to 3.9%.
INFLATION | Inflationary pressures ease again in June
Inflation inched down again to 3.3% in June from 3.4% in May. Softer inflation was seen in the Dominican Republic, El Salvador, Honduras, Jamaica, and Panama. Conversely, inflation was higher for Costa Rica, Guatemala, Haiti and Nicaragua.
Our Consensus Forecast panelists lowered their 2017 inflation estimates for a second time running to 3.1%, down 0.1 percentage points from last month’s forecast. Inflation expectations are being reassessed across the region as oil prices struggle to make gains and skepticism regarding the current path of U.S. monetary tightening grows. For 2018, they still see inflation at 3.4%.
Written by: David Ampudia, Senior Economist